Why Discounting Was Never A Good User Acquisition Strategy for Startups

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The Indian millennial definitely remembers the Nokia 1011. It was a rage; you could just dial someone living miles away and speak. Back then there were discussions about the pros and cons of this device, it defined life and luxury. Now in 2016, you’re not fascinated with a mobile phone, everyone has access to it and it has become a way of life, from a luxury product to a bare necessity.

Similarly, everyone is now talking about ‘Startup Valuation’ and how the same millennial kids have incorporated unicorn companies. Let’s understand Startup Valuation to gain a fair understanding of the subject.

For traditional companies, the valuation is done on market capitalization, sales and the bottom line, but for startups, the rules change. Startups have the benefit of it being calculated by various methodologies based on ‘Traction vs Market Size’. Factors such as asset valuation, revenue model, customers / users, intellectual property rights, partners, success growth rate, founding team and various risk factors of the market come into play.

Many startups would like to have high frothy valuations of their companies in the hope that bigger investors would buy them out. Among all the factors that could take them to that position, it seems like we startups have figured out a quick and easier way to achieve an increase in the number of users or customers of the product.

Step one, raise a series of funding from various sources; step two, start giving discounts and cash back / wallets to attract users; step three, show a large jump in the traction size of the market. Once the traction size increases these startups are bought out by bigger players. Let me explain you this with an example. You all must aware that Flipkart has now bought out Jabong, which has already received multiple rounds of funding. Was this move a strategic one or was it just a valuation game? Were the founders of Jabong and Flipkart for this or was it something they had no control over?

A highly funded and backed startup liked PepperTap has already closed down due to large discounting cutting their cash flows and several other market factors.“We are pulling a plug from B2C grocery business and pivoting to a full stack eCommerce logistics company. Shutting down PepperTap was an extremely difficult call for us but it was the need of an hour,” said Navneet Singh, CEO of PepperTap.

It seems like startups are interested in raising funds only in the hope that they 'll be bought out by bigger sharks. Since an interest in the revenue model and sustainability of their business is not seen across the ‘startup industry’, thus giving huge discounts by burning investors’ money seems like the logical explanation across all platforms.

Startups need money and funds need places to invest, it's a match made in heaven but the intention behind the investment isn't the most cordial for startups. The fact that an investor comes on board not for the dividends or profits but for selling out, makes startups a larger avatar of stock exchanges.

Earlier there were terms like NGO, business, public companies and now there's a term called 'Startup' It's because the logic of "business" does not apply to a Startups. So is it the founders or the investors that have caused this radical shift in perception of what is a business?

Angel investor Utsav Somani said, “Giving discounts is a short term, valuation bump up game which will not work for really long as the coffers are drying up and sense is prevailing. Just how Snapdeal’s CEO said, GMV was the word for 2015 and 2016 is going to be about giving customer satisfaction and experience the top priority. Also, valuation game does not last until the IPO stage because that is when the public markets and banks do strict diligence and scrutiny and public market regulations come under the play. So things will start to normalize with all players keeping their heads down and focusing on attaining free cash flow status.”

Ebrahim Ishaq, co-founder TheChairr.com supports the conversation by quoting, "We've just begun conversations with interested investors for raising our first round of external investment, and the one thing we've requested each one of them is to consider TheChairr as a business investment and not as a short term hedge fund."

Though having said that, monetary incentives like discounts is a good idea to make an existing customer or user try a new feature of the product he or she is already patronizing. Zomato has got this bit right with their light discounts when using their online ordering tool.

When “getting it cheaper” becomes the first and sole purpose behind the user using the product, it becomes very difficult to make that user a genuine user of the product. As soon as the discounting is discontinued, generally such users shift to another product offering discounts. Though there are some speculated success stories who’ve used discounted pricing as a strategy to lure users with the hope that once they’re avid users of the product the pricing will be normalized and eventually the profit margins will help recover the losses made in discounting. Uber is one such hopeful example that could someday make a great case study.

Bhavyassh Agarwaal, co-founder TheChairr.com said, "We believe our business fundamentally seems stable and we strongly believe that luring users by giving them heavy discounts or free money in their wallets is not the right way to go. Simply because the percentage of repeat users will be extremely low once the monetary incentives are withdrawn. We do not want to spend money on attracting the wrong set of users."

Apart from building parallel laws of economics in India, startups are connecting buyers and sellers, providing greater value in terms of services offered, improving the market expectation and forcing other business to match the service as well as product standards.

The central government is coming up several schemes and policy to encourage the startup culture in India. These are interesting times to live in; the Indian millennia will see India change. We were there when the mobile phone was introduced, we are living in the startup generation and I am sure a few years from now, when the unnecessary discounting slows down and pricing rebounds to normalcy with strong tech infrastructure built across India, people will not talk about valuations and discounts but about the quality of products and services.

Startups will be then treated as the traditional business and then the ones that can add utility to the market while making business sense will flourish.